Gold Action #424

Dr. Clive Roffey
Jun 26, 2006

In almost every major global market the relative strengths of the metals indexes have moved into superior performance mode. These are selective markets, not ones in which the hackneyed concept of diversification can be applied. Academic portfolio diversification theory works well provided there is a bull market in operation. But in a bear market it fails miserably. This is a sector dominated market not one in which you can take a cross section of the market and diversify. The market has dealt us a poker hand that is specifically dominated by metals. Your course of action is clear. Either invest in metal and resource stocks or move into cash. There is no diversification, only specific decisions. This is a 'take it or leave it' market.

Technical analysis is often criticized for its lack of back-testing ability. There is no one formulation that can be used in every type of market. We use support and resistance as well as trends and volume for examining supply and demand levels. Candlesticks are used for turning points as well as oscillator grouping and divergence. Elliott is used to determine the position in a market and relative strength for deciding on the superior performers or the laggards. But each type of analysis has its own application at different stages of a market.

At this point of time, now that the bear is in place, relative strength is the key technical format to be applied. Only sectors with positive relative strength as well as good chart data are considered. Sectors with negative relative strength are for going short, not buying.

My whole analysis of the past year has been detailing that I expect the resources to out perform the general equities. This will really come into play during the next market phase as general equities slide and metal prices revert to trend and go through the roof.

We are in a long term bull market in metals and resources. So what if US growth slows by 1%, the Chinese and Indians will take up the slack. Their internal growth into middle class is expanding at around 25% per annum. This is a numbers game and the Chinese and Indians have total superiority in that field.

Meanwhile the Rand has collapsed to R7.50. I have constantly pointed out the huge base on this data and indicated an upside potential to R8.50. There was a strong resistance at R7 but that has been well and truly smashed and the R8.50 target now looks like a reality in the coming months.

The importance of this weakening is amplified when one considers that it has been against a background of a rising gold price. The tenuous relationship of rising gold and strong Rand has been thrown out of the window. Emerging market currencies previous offered wide interest rate gaps that provided low risk attractive returns. But these interest rate gaps have been considerably narrowed to the point of higher risk and the emerging market currencies are being ditched in favour of protection and safety. The ultimate position is that we are likely to continue with a weak Rand and rising dollar gold price. This is a classic recipe for booming gold and platinum stocks in conjunction with all the other commodity stocks.

Colonialism is alive and well in Africa. The Chinese are not only buying up every mineral and oil right in sight but promising to provide roads and infrastructure to go with it. Whereas the US wrote off Africa as the backside of the world the Chinese are securing their mineral supply positions. So there cannot be much wrong with the forward prospects for Chinese growth!!

As the old adage goes... when G-d was sprinkling the mineral distribution around the world he reached Southern Africa and sneezed and dropped the lot.

	The DJIA has several negative aspects. There is a significant head and shoulders top brewing. The current minor rally is the right shoulder. Note the two short term tops on the RSI in the bottom frame. The current index price is nowhere near touching the recent 11300 short term peak in late May. This is setting up a reverse divergence signal that indicates further significant downside once the rally has ended. This is a hugely bearish chart with a short term downside count to 9700.
	The NASDAQ is no better. There is a series of divergences sell signals that are dominating the chart. The main up trend has been broken. This is a sell on a rally situation and NOT a buying area.
	The FT 100 has also formed a series of divergence sell signals that I detailed several weeks ago in my special report on the "Dangerous global indexes". But the key is once again the prospects of a reverse divergence sell signal. Note that both the RSI and MACD have moved above the recent high at T1 but that the index is not through this level. The index is not confirming the oscillator breakout. This signals that after the rally there is more to come on the downside. This is a classic bear market. Get used to it!!
	The Rand has weakened significantly against the Dollar. Friday touched R7.47. This is extremely over priced and I expect a reaction back to the R7.20 level from what is a well overdone charge as currencies are dumped. But there is no sign of an divergences and so I must look for further significant weakness once the short term breather is over. This can only be GREAT for gold shares.
	Whilst the previous daily chart above looks to be overdone the weekly chart here has only just started. There is a huge base pattern on the Rand with a long term divergence signal. The recent move above R7 has broken through this critical long term resistance and triggered an upside potential to at least R8.50. There is no sign of any divergence and the data indicates a stable upside trend. This indicates much further Rand weakness going forward for the next six to nine months.
	Finally the Brent Crude OIL chart has pulled back to test the critical support at $67. There is no sign of any sell divergence indicating that the oil price remains inside a stable up trend in a continuing bull market. A move back above $71 will trigger a move to at least $85.
	I have constantly detailed the relative strength of the $Gold price against the Dow and shown the positive nature of metal prices relative to general equities. There is nothing to alter this situation. I mi=ust look for resources to offer continued better investment prospects than global general equities.
	CBOT wheat is compared to the Dow. This is to confirm that the performance race is not just confined to metals but also refers to the grains. For the past two years the wheat chart relative to the Dow in grey has been forming a serious base pattern that is ready for some serious upside action. Markets are not just metal bullish but also grain bullish. This area of the commodities that has lagged behind for so long is about to play catch up.
	CBOT Soya is also ready for a period of sustained bullishness against the general equity markets. The whole point of these last two charts is to emphasize the importance of the whole range of resource markets that are in the performance ascendancy relative to general equities.
	My Elliott analysis of the Gold price remains on track. The key to this data is that the RSI has made new highs along with the gold price. This continues to indicate a stable bull market with further upside potential after this correction. In the last issue I detailed that the price had failed to follow the RSI to new short term lows and that this was the signal for a trend reversal back into bullish mode. This has happened.
	The Euro / $ chart has reached a critical stage. There is a clear resistance at $1.30 and support for the dollar at $1.18. A move above $1.30 to weakness will trigger a count to $1.47 for the $. But a drift under R1.18 will lead to a potential of $1.00. I dislike positions of this type that have indeterminate data. But that is where we are at. Watch both levels very closely as a move above $1.30 will trigger significant gold and metal strength.
	The Euro against Sterling has been inside a massive triangular pattern for the past three years. Triangles are usually continuation patterns that indicate the next move will be the same as that leading into the pattern. That indicates Euro strength against sterling and also by proxy against the $. For whatever reason the Euro is likely top be the centre pivot currency going forward.

Jun 24, 2006
Dr. Clive Roffey
Johannesburg
South Africa
email: info@utm.co.za
Roffey archives

"Gold Action" is a fortnightly commentary on global gold and precious metal markets produced by Dr. Clive Roffey, Johannesburg, South Africa, a leading professional independent commentator on gold markets since 1969.

321gold Inc